Property and the economy
The property market always was a very important segment of the Irish investment market, but in recent years it has bulked even larger as an indigenous ‘asset class’, because bonds and other interest rate plays have become pan European, and because of the exceptional returns shown by the sector in recent years.
Of course the strength of property returns in the run up to the launch of the euro were exceptional, and not to be repeated, and hence investor caution is appropriate in the property market now. The period of rapid double digit price increases has come to an end and certainly at the top end of the residential, commercial and development land markets it has - since in these columns, writing a year ago, former Central Banker Willie Slattery of Deutsche Bank, warned of the dangers of a potential fall in property values of 20 to 25 per cent.
The dangers of a return to excessive property price inflation should continue to be borne in mind, as the ratio of property prices to incomes has risen compared with pre-euro times.
However, compared with those pre-euro times there are probably grounds for believing that an increase in ratios of property affordability are warranted, because euro interest rates are in low single figures rather than in double digits, as they were in Irish pound days. This would indicate that a doubling in affordability ratios is appropriate. However, if the market is to price these in, and cause property prices to double in value, as it has done on account of the eurp factor, then there should be little margin of comfort to protect against a fall in values, and might be occasioned by a sharp rise, say, in euro interest rates.
This, caution should continue to prevail in property. This emerges from our poll in this issue amongst the leading Irish economists. Also revealed in our property survey are, in a number of articles, evidence of a post boom scenario in property especially in areas of the market where, as should be the case in a properly functioning market, supply factors are allowed to operate outside of the constraints of excessive Government intervention. An example is the commercial property market, where increased supply, as some of our writers report, is serving to alleviate the bottlenecks that were being caused by the Celtic Tiger. This is good for the economy, as supply is now rising to meet demand.
The same cannot be said for the domestic housing market, where Government tinkering in the tax system, combined with dictats such as the social housing rule, combined with an antiquated planning process is resulting in a choking off of necessary investment in the housing market. House starts have fallen in the past year, and this cannot but be a factor behind further sharp price increases in house prices in the coming years.
This is a potentially serious dampener to economic prospects because housing costs are perhaps the most important component in wage costs of young people in their twenties and thirties the core labour market for the future success of the Celtic Tiger economy.
Another serious hindrance to the economy along with housing is the transport system, again, held back by bureaucratic stifling and the maintenance of monopolies by Government. It is not insignificant that in every sector of transport where monoplies have been fostered by Government from the Dublin toll bridges (hit by strikes), to the airports (hit by ongoing unofficial industrial action), the railroads and Dart, and indeed, the taxis (until they were de-regulated) a stranglehold is being put on the freedom of the market to provide solutions to the bottlenecks caused by the booming economy.
It is time for the transport sector to be spotlighted as a major problem area in the Irish economy de-regulation as is needed there, and where there is public sector involvement as in the roads, a modern foresighted approach, in conjunction with private sector financing (through PPPs, for example) needs to be developed. The recent call of Denis O’Brien for the National Roads Authority to resign on account of the chaos they have presided over is valid, and the time is long overdue for a serious degree of accountability to be insisted upon for those who have presided over the chaos in our infrastructural planning, itself another key element in the increased costs of housing in recent years. |
